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Ann found an apartment that costs $500,000. She has saved $100,000 for a down payment and will get a mortgage for $400,000. It will be

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Ann found an apartment that costs $500,000. She has saved $100,000 for a down payment and will get a mortgage for $400,000. It will be a fully amortizing. 30 year, 1/1 adjustable rate mortgage with monthly payments. The initial rate is 2%. The rate will reset to 175 basis points above the LIBOR. There are no rate caps. The initial LIBOR is 1%. The following 4 questions will use this information. a) What is Ann's payment for the first 12 months? b) Suppose the LIBOR remains the same in the second year as it was in the first. What is Ann's payment in the 2nd year? c) What is Ann's APR? (i.e. What is Ann's IRR on this loan assuming the index remains the same for the life of the loan? Please give the annual IRR, so multiply the monthly IRR by 12) d) Suppose the LIBOR at the first reset is 7%. What is Ann's monthly mortgage payment in the 2nd year? Ann plans on living in NYC for exactly 1 year. Ann is considering whether she should buy or rent. If Ann chooses to own, she will buy in year 0 (now) and sell in year 1 (one year from now). If Ann chooses to rent, she will pay rent once in year 1 (one year from now). Rent costs $6.000 for the entire year. If she buys the apartment it will cost $120.000 now. If Ann buys, assume she will get a 30-year interest only (IO) loan, with no prepayment penalty, with annual payments, for $90,000 at 5%. There are no closing costs or points for the mortgage. There are no buying or selling costs. Other costs of ownership: Property taxes = 5% of the property price. Insurance = 1% of the property price. Maintenance = 5% of the property price. Ann's average income tax rate is 27%, her marginal income tax rate is 30%. Suppose the apartment price will grow 5% over the year. Ann will pay taxes/insurance/maintenance in year 1, based on the property value in year 1. Ann will pay the down-payment and purchase costs from her savings. a) If Ann buys, what is her total cost of ownership for the first year? (DO NOT include the cost of buying or selling the apartment.) b) If Ann buys, what is her total benefit from ownership in the first year? Benefits equal saved rent plus tax-shield. Mortgage interest and property taxes are income tax deductible. DO NOT include proceeds from selling the apartment

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